Financial Accounting
Financial Accounting
17th Edition
ISBN: 9781259692390
Author: Jan Williams, Susan Haka, Mark S Bettner, Joseph V Carcello
Publisher: McGraw-Hill Education
Question
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Chapter 8, Problem 4PB

a.

To determine

Prepare the journal entries for the shrinkage loss under (1) average cost method and (2) LIFO method.

a.

Expert Solution
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Explanation of Solution

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
  • Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, and expenses.

First-in-First-Out (FIFO): In this method, items purchased initially are sold first. So, the value of the ending inventory consist the recent cost for the remaining unsold items.

Last-in-First-Out (LIFO): In this method, items purchased recently are sold first. So, the value of the ending inventory consist the initial cost for the remaining unsold items.

Average Cost method: In this method, the inventories are priced at the average rate of goods available for sales.

Prepare the journal entries for the shrinkage loss under FIFO and LIFO method as follows:

1. Shrinkage loss under average cost method

DateAccount Title and ExplanationPost Ref.DebitCredit
 Cost of goods sold (3) $107 
 Inventory  $107
 (To record the shrinkage loss  incurred under average cost method)   

Table (1)

  • Cost of goods sold is an operating expense account and decreases the stockholders’ equity account by $107. Therefore, debit cost of goods account with $107.
  • Inventory is an asset account, and it decreases the value of assets by $107. Therefore, credit inventory account with $107.

Working note:

Calculate the units of shrinkage loss

Shrinkage loss unit = (Total available sales unitNumber of physical inventory on the hand )=200 units 199 units= 1 units (1)

Calculate the average cost per unit

Average cost per unit }Total cost of unitsTotal Number of units=$21,400200 units=$107 (2)

Calculate the value of shrinkage loss under average cost method

Shrinkage loss under Average cost method}= Shrinkage loss units (1)× Average cost per unit  (2) =1 units ×$107=$107 (3)

2. Shrinkage loss under LIFO method

DateAccount Title and ExplanationPost Ref.DebitCredit
 Cost of goods sold (4) $120 
 Inventory  $120
 (To record the shrinkage loss  incurred under LIFO method)   

Table (2)

  • Cost of goods sold is an operating expense account and decreases the stockholders’ equity account by $120. Therefore, debit cost of goods account with $120.
  • Inventory is an asset account, and it decreases the value of assets by $120. Therefore, credit inventory account with $120.

Working note:

Shrinkage loss under LIFO= Shrinkage loss units (1)× Cost per unit under  LIFO = 1units ×$120=$120 (4)

b.

To determine

Prepare the journal entries to record (1) shrinkages losses under FIFO and (2) loss from write-down inventory under lower-of-cost-or market.

b.

Expert Solution
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Explanation of Solution

Lower-of-cost-or-market: The lower-of-cost-or-market (LCM) is a method which requires the reporting of the ending merchandise inventory in the financial statement of a company, at its current market value or at is historical cost price, whichever is less.

Prepare the journal entries to record (1) shrinkages losses under FIFO and (2) loss from write-down inventory under lower-of-cost-or market as follows:

(1) Shrinkages losses under FIFO:

DateAccount Title and ExplanationPost Ref.DebitCredit
 Cost of goods sold (5) $100 
 Inventory  $100
 (To record the shrinkage loss  incurred under FIFO method)   

Table (2)

  • Cost of goods sold is an operating expense account and decreases the stockholders’ equity account by $100. Therefore, debit cost of goods account with $100.
  • Inventory is an asset account, and it decreases the value of assets by $100. Therefore, credit inventory account with $100.

Working note:

Shrinkage loss under FIFO= Shrinkage loss units (1)× Cost per unit under  FIFO =1 units ×$100=$100 (5)

(2) Loss from write-down inventory under lower-of-cost-or market

DateAccount Title and ExplanationPost Ref.DebitCredit
 Cost of goods sold (2) $3,390 
 Inventory  $3,390
 (To record the loss from write-down of inventory)   

Table (1)

  • Cost of goods sold is an operating expense account and decreases the stockholders’ equity account by $3,390. Therefore, debit cost of goods account with $3,390.
  • Inventory is an asset account, and it decreases the value of assets by $3,390. Therefore, credit inventory account with $3,390.

Working note:

Calculate the value of replacement cost

Relacement cost = [Inventory on hand on December 31×Replacement cost per unit]=199 units×$90=$17,910 (6)

Calculate loss from write-down of inventory

Loss from write-down of inventory} = [(Total cost available for saleShrinkage loss under FIFO (5)) Replacement cost (6)]=[($21,400$100)$17,910]=$21,300$17,910=$3,390 (6)

c.

To determine

Explain whether Company S has used the hidden camera to entrap its client or not.

c.

Expert Solution
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Explanation of Solution

Explain whether Company S has used the hidden camera to entrap its client or not as follows:

No, Company S has not used the hidden camera to entrap its client because, Company S uses the hidden camera to watch the activities of employees, and it helps to reduce the shrinkage losses of inventory and protects from the fraudulent activities. Hence, Company S has not used the hidden camera to entrap its client.

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